Aug. 8 (Bloomberg) -- Two of Australia's biggest mortgage lenders have signaled they may bow to government pressure and pass on potential central bank interest-rate cuts to borrowers, helping offset slower economic growth.

Westpac Banking Corp. would ``love to pass through the full'' amount of any Reserve Bank of Australia rate cuts to the majority of its customers, who hold variable-rate mortgages, Chief Executive Officer Gail Kelly said in Sydney. Australia & New Zealand Banking Group today said it will lower the rate on fixed-rate mortgages.

Australia's banks have faced government criticism for raising mortgage rates by more than the central bank increased its benchmark this year. Pressure on lenders to get back in step with the Reserve Bank is intensifying after Governor Glenn Stevens signaled this week he may cut the overnight cash rate target for the first time in seven years, triggering a drop in the cost of wholesale funding for banks.

``The banks are 50 basis points ahead alone on the Reserve Bank's signaling of a rate cut,'' said Scott Haslem, a senior economist at UBS AG in Sydney. ``There will be significant pressure placed on banks to pass on any move the central bank makes. The banks are going to pass it on.''

ANZ Bank today cut rates on fixed-rate mortgages by between 11 basis points and 50 basis points. Still, almost 90 percent of Australian borrowers have variable rate mortgages, which historically have moved in step with the Reserve Bank's benchmark.

Currency Tumbles

Stevens raised the overnight cash rate target in March to a 12-year-high 7.25 percent in a bid to cool inflation that hit 4.5 percent in the second quarter. He said on Aug. 5 there is increasing ``scope to move towards a less restrictive stance.''

His comments stoked speculation the Reserve Bank will cut borrowing costs as soon as next month, and sent the Australian dollar below 90 U.S. cents today for the first time since March. The currency has fallen more than 8 percent against its U.S. counterpart since hitting a 25-year high of 98.49 cents July 16.

Policy makers will cut the benchmark rate by at least 25 basis points to 7 percent when they meet on Sept. 2, according to 18 of 25 economists surveyed by Bloomberg News today. Of those, five predict a 50 basis point cut and seven expect no change.

Prime Minister Kevin Rudd stepped up pressure on lenders today, telling reporters in Beijing that banks ``have a responsibility'' to ensure changes to their mortgage rates reflect those of the Reserve Bank.

Regulation Threat

The government has also signaled it may increase regulations on banks if they are ``not competitive enough,'' according to Treasurer Wayne Swan. ``We'll keep an eagle on banks as we go through the year,'' he said yesterday in Melbourne.

Expectations of a reduction in the central bank's benchmark rate have caused a drop in the rate banks charge each other for loans. The Australian three-month bank bill swap rate fell to 7.32 percent today from 7.59 percent before Steven's Aug. 5 comments, and 7.83 percent three weeks ago.

Westpac's Kelly told investors at a briefing today that ``it's positive that we have a Reserve Bank that's prepared to move quickly and that we have visible room to move.

``Clearly, we would love to pass through the full 25 basis points of drop if that were to occur,'' Kelly said. ``But we'll need to factor in all of those issues at the time.''

Australia & New Zealand Banking Group Ltd. also said today it would like to cut variable interest rates, though it, too, fell short of guaranteeing it would follow any Reserve Bank move.

Mortgage Payments

``We would like to cut those interest rates, but we will have to assess what is happening to our funding costs at that time,'' Michael Rowland, ANZ's managing director for mortgages, told a parliamentary inquiry into competition in banking in Melbourne today. His comments were made before ANZ cut its fixed rates.

Australia's five largest banks, Westpac, ANZ, Commonwealth Bank of Australia, National Australia Bank Ltd. and St. George Bank Ltd., have added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank has added a total of 50 basis points to the benchmark rate in that time.

The increases have added A$250 ($224) to monthly payments on an average A$250,000 home loan, according to the Real Estate Institute. Households spent 38 percent of their incomes repaying mortgages in the March quarter, the most in the 22 years that the institute has measured affordability.

``The tightening in financial conditions, in conjunction with other factors, including rising fuel costs, and lower asset values, has restrained demand,'' Stevens said this week.

Consumer confidence slumped in July to the lowest level in 16 years and home-loan approvals tumbled in June to a four-year low, recent reports show. House prices fell in the second quarter for the first time in almost three years.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: August 8, 2008 01:51 EDT